Review: Wealth

Most of the personal finance books I review make some assumptions about the reader. They usually assume that the person is suffering some degree of financial hardship (usually debt) or, in the best case, merely has a relatively low net worth. Investment books speak to people usually just starting out in investing, people who are relatively insecure about their investment choices, or people wanting to learn a new investment strategy.

This book focuses in on another level, a level most people don’t have to think about. How does one manage a substantial accumulated wealth? Obviously, you want the money to continue to help your family, but what about beyond that? And how do you instill principles in your descendents if you are leaving them a substantial amount of money? I’ve watched more than one family torn apart because of issues like these, and I’ve seen money completely go to waste because no one knew what they were doing in terms of managing it.

Wealth focuses specifically on these types of issues, ones that you might face if you were a very successful entrepreneur or, at the very least, the first financially successful person in your family. You build up a substantial amount of money because you had the entrepreneurial touch, but now you haven’t the faintest clue what to do with it.

Interestingly, even though I’m far from being in this type of situation, I found a lot of the material in Wealth actually spoke to me as well. I tend to take a very long view of things – I ask questions about what kind of position I’ll be in in fifty years. Wealth really helped me think about what kind of goals I want to set for that timeframe: do I want to leave a legacy for my family? If I do, how do I want to handle it without driving my family apart? This book gave me a lot to chew on.

The author, Stuart Lucas, is a heir to the J.E. Stuart family fortune from Carnation, the dairy products company, so he is actually exposed to these issues in detail in his life. What sort of lessons did this experience teach him? Let’s dig in and find out.

1 – Protecting and Growing Your Wealth
This opening chapter really lays down the reasoning behind the entire book by starting off with a very critical examination of financial advisors and, for that matter, the entire financial advisor industry. Basically, when you ask an advisor to manage your money, you’re giving them a ton of leverage, and most of them use that leverage to make themselves rich.

The biggest reason behind this, in a nutshell, is that people merely select investments based purely on which ones appear on paper to give nice, healthy returns that they can live with, then don’t worry about anything else. They don’t concern themselves with making sure these investments and financial moves are in line with their personal values and they don’t make sure that they’re really getting a good deal for their dollar. These two points are where financial advisors can make a fortune – and you can lose that fortune. The rest of the book discusses solutions to these two problems.

2 – Eight Principles of Strategic Wealth ManagementWealth outlines eight specific principles that anyone can use to manage a pool of money, and I think they apply almost as well to the beginning investor with $5,000 in an investment account as they do to the heirs of the Carnation fortune:

1. Take charge and do it early.
2. Align family and business interests around wealth-building goals and strategies.
3. Create a culture of accountability.
4. Capitalize on your family’s combined resources.
5. Delegate, empower, and respect independence.
6. Diversify but focus.
7. Err on the side of simplicity where possible.
8. Develop future family leaders with strong wealth management skills.

I could go on for hours breaking these down (in fact, maybe I will soon), but these basic principles really work for everyone. They seem like such simple bromides, yet so many investors fail to take these points home.

3 – Everything Begins With Values
This chapter is quite interesting, because it would have fit very well with the book I talked about last week, It Pays To Talk. Why? This entire chapter is a series of questions that are best suited to be discussed in a family meeting environment. Many of these don’t have simple answers, of course, but without establishing the core values that guide your family, your investments won’t be guided by any central principles and will thus be done haphazardly, likely following the advice of people who really don’t have your best interests at heart.

For example, my core values in terms of investing are diversity and low fees. I don’t feel that I need to pay a lot of managers to manage a portfolio that’s spread widely across the market and I’m generally quite happy to float along with the general state of the stock market. In terms of individual stock investing, I prefer to invest in companies that I know well because I tend to follow their businesses as a matter of course. Can you succinctly describe your investment values in the same way?

4 – Defining Your Financial Objectives
Basically, most wealth management plans break down into two groups: distribution plans and growth plans. Distribution plans are for situations where you’re looking to split up and distribute a wealth over a relatively short timeframe (half a lifetime or less) – these plans revolve around slowly distributing the wealth away from one central estate to various beneficiaries, either in one lump sum or in pieces over time. Growth plans are for families that want to actually grow their pool of wealth and use it as the backbone for living over many, many years – this usually involves making sure that the principal always grows at a rate that exceeds inflation no matter what portions of it are spent.

Which one is really right for you? Generally, smaller estates (like, for example, the successful upper middle class investor or small business owner) will use the distribution model to split up the estate when the time comes, while larger estates (like, for example, the Carnation inheritance) are large enough that they can be managed for growth and still support a large family of descendents. In both cases, the key is to establish a legally binding document at the source of it all that establishes some basic rules for the estate that everyone agrees to and follows.

5 – The Enchanted Forest, The Secret Society, And The Capital Kibbutz
The title of this chapter is strange, but it actually is rather interesting. In it, Lucas divides the investment world into three separate places:

The Enchanted Forest refers to most mutual funds and managed investments. It’s generally one where everything appears to be managed and it seems to be a wonderful place to be, but after you’re there for a while, the enchantment falls away and you realize the returns aren’t all that good. Think Merrill Lynch.

The Secret Society refers to well-managed hedge funds and exceptional investors, people who truly have the golden touch. Think of a killer hedge fund and you probably have the right idea. Basically, there’s no easy way to join this world, and there’s also no guarantee that you’re not really just in the Enchanted Forest with someone who takes a ton of risk that will eventually bite back – hard. It usually takes a ton of money or a ton of skill to get into this world.

The Capital Kibbutz sounds a lot like where I am. Basically, this place refers to low-cost index funds and the like – a place where very simple investment rules are followed, but they don’t cost much and do pretty well. Vanguard, for example, resides in the Capital Kibbutz. I tend to think that this is where most investors should be, actually – you don’t have to have much money at all to get in, the returns are good, and it’s not hard to do.

Index Investing This is largely appropriate for people who only have a relatively small amount of wealth to invest and no other assets. Think of the middle manager who puts 10% a year into an investment portfolio. Basically, buy a diversity of index funds and live squarely in the Capital Kibbutz.

Barbell Investing This basically takes index investing and balances it against building things that have potential for a lot of growth, like a business or a top career, and money is shuttled back and forth between the two in high-interest savings opportunities. This works well for entrepreneurs and people who are seriously aiming for the top of a corporate ladder, because part of it is investing in the business or investing in yourself.

Active Alpha Investing This works if you have enough capital to focus solely on investing – think of a heir to a fortune. It uses index investing as a baseline, but from there the investor has enough time to truly research things and find places to put large sums of money so that the return on that investment versus the indexes is worth the time. This really only works if you can devote a lot of time to investing and have capital to fall back on, so for many people this simply doesn’t work.

7 – Making Your Most Important Hire
This chapter is all about hiring a financial adminstrator to manage your money. I was initially rolling my eyes at the topic, but the chapter made several good points. First, many people who would consider hiring an administrator for their wealth usually have a substantial amount of money to manage. Second, most people are not well informed investors and have no interest in devoting the time it takes to be a smart, top-quality investor.

That’s not to say that the chapter doesn’t at least suggest that you administer your own money – it does. Honestly, I would have to be absurdly rich for me not to want to be my own financial manager, but I can easily see why others might not make the same choice when facing down a substantial sum.

8 – Taxes Can Be Your Ally!
This chapter basically says that by appropriately managing your assets and focusing on generating long term capital gains rather than focusing on income generation, you can put yourself in a position where taxes are a much smaller burden. Why? The federal government’s tax laws are designed to encourage investment much more than income through labor. An individual who has enough stocks invested that he/she can live off of long term capital gains and dividends will have a much, much smaller tax burden than people who work for a living – it’s a simple fact.

Basically, this means that you should generally focus on long-term investing so that your taxes on money you make from those investments is small. I consider this chapter to be a powerful argument of becoming a shareholder in a company that pays large dividends – just sit on those shares, collect the dividends, pay only a small tax on those, and live!

9 – Promoting Entrepreneurial Stewardship
How do you teach young people and build their character so that they can invest and be mature leaders? This is one of the best chapters on how to parent to make your child a strong investor and community leader that I’ve ever read. Basically, encourage them to get good grades and take on leadership roles outside of the community. My parents actually did this for me and it worked to some extent, but I didn’t really have any role models to put the pieces together.

The book also encourages that young people be involved in family financial planning from an early age, so they can absorb the principles and logic without being burdened with the great responsibility of actually managing things. I strongly agree with this point – I want to involve my children in all of our financial decisions all of the way along, so they can see mature financial decisions at work. I earnestly believe that the taboo against this in many families stems from individuals uncomfortable with showing their children the disastrous state of their finances – and in the end that hurts the children and causes them to make the same disastrous choices.

10 – Making Philanthropy Part Of Your Strategic Wealth ProgramWealth spends some time discussing philanthropy in detail, going through a litany of giving options. In general, the book seems to suggest focusing on one specific area of philanthropy, good advice unless your wealth gets into the Bill Gates/Warren Buffett stratosphere. For example, one may be willing to use 10% of an estate for a philanthropic purpose, such as opening a library or financing a perpetual scholarship fund – something big that will have long term impact instead of small donations.

It was an interesting read, but this chapter is mostly useful to people with very large estates that they’re trying to manage, out of the realm of almost everyone who will read this review.

11 – Putting It All Together: Multigenerational Planning And Wealth Transfer
This is basically a “wrapping things up” chapter that really puts focus on training the next generations on how to maturely handle the wealth both in terms of education and the actual mechanics of transferring stewardship. Again, this information really only applies to large estates, not so much to most people.

Buy or Don’t Buy?

Simply put, the more money you currently have – or the more money you realistically expect to have later in life – the more worthwhile this book is to you. It speaks to issues affecting people who have substantial amounts of money, and while there are lessons inside that do apply to everyone, most of the material really begins to apply when you build up substantial money.

That doesn’t mean it’s not worth reading if you’re just starting to build wealth – I actually think that’s the best time to read it. It just doesn’t speak to people who are fighting off debt or are focused on accumulating enough cash to pay for their child’s college education.

It seems to me that the biggest thing it assumes is that you have progeny to pass on money to. Its vaguely possible that I might have children or wealth, but whilst I can think about passing on wealth I haven’t got, I can’t get my head around passing on wealth to people I haven’t got.

I can see why it would be better to read it before you have great wealth thrust upon you. Its easier to get things lined up if you think about them in advance.

Books worth budgeting for

My new book, The Simple Dollar: How One Man Wiped Out His Debts and Achieved the Life of His Dreams, is available in bookstores now. Check out some of the life-changing experiences the book has given readers!

Check out my book, 365 Ways to Live Cheap, available in bookstores everywhere! It's filled with 365 great tactics you can apply to your personal finances, from frugal tips to great ideas for managing your money.